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Changes in the taxation of employee stock options


On 17 December 2020 amendments to the Personal Income Tax Law were approved by the Latvian Parliament. As a result of the amendments, the exemption from payroll taxes in respect of employee stock options will cover also the options issued by limited liability companies.

So far the employee’s income from stock options was exempt from payroll taxes provided that: (i) the stock options were granted pursuant to a stock option plan; (ii) the minimum holding period of the options (the period between the grant of option and its exercise) is 36 months; (iii) during the entire period from the date of grant until the date of exercise the individual remained employed either by the company that granted the stock option or by an affiliate; and (iv) the Revenue Service is notified about the grant of stock options not later than two months from the date of grant or the date at which the employee can apply for the stock options.

The Ministry of Finance and the Revenue Service interpreted the law to mean that the exemption is available only where the stock options are issued by a joint stock company.

The amendments extend the tax exemption to options issued by limited liability companies. The minimum holding period is reduced from 36 months to 12 months. In addition, it will be possible to exercise the option within six months after employment is terminated without losing the tax exemption.

According to the amendments the tax exemption will be available, if at the moment of the exercise of the option there is no outstanding loan due from the employee to the company (its affiliate) which has granted the options.

The adopted amendments will significantly improve competitiveness of Latvia. This change is particularly relevant for start-ups that usually are incorporated in the form of limited liability companies.

COBALT was honoured and pleased to assist with the drafting and advocating for the above amendments.

The amendments still need to be promulgated by the president of Latvia in order to become effective.

For more information and advice please contact COBALT Latvia Partner Sandija Novicka.